PHOENIX — Democratic Gov. Katie Hobbs won’t have much room for new spending on education, water — or just about anything else — in the remaining two years of her initial term as Arizona’s chief executive.

That’s based on new projections from the Legislature’s budget analysts.

The good news is the $2 billion deficit Hobbs faced in the current budget year isn’t reappearing. The bad news is the across-the-board cuts to state agency budgets, delays to already-funded road and other infrastructure projects and special fund raids that helped lawmakers and the governor close that deficit are unlikely to be restored.

And there is also a looming fiscal cliff on education with next year’s expiration of Proposition 123, a measure passed by voters under previous Gov. Doug Ducey that funnels nearly $300 million a year to K-12 schools.

Backfilling that funding and other “formula” increases to state spending for schools and Arizona’s Medicaid health insurance plan will use up much of the extra cash available in the next three years, according to a presentation by the Joint Legislative Budget Committee staff this past week.

That doesn’t include what has been labeled as “one-time” spending, notably state employee health care costs and the school repair fund. In reality, those really are ongoing expenses that will have to be included in future spending plans.

All in all, Arizona’s current-year revenues are running $425 million above that projected in the budget enacted in June.

But that money isn’t the windfall it appears to be because that’s not how budgets are built, the JLBC’s Richard Stavneak said during last Wednesday’s meeting of the Finance Advisory Committee. That group includes the JLBC staff and outside economists who provide analysis of the state and federal and how their performance will affect state finances.

Instead, budgets are built looking at anticipated revenues over the coming three years.

Using that metric, Hobbs and the Legislature will have only $159 million in ongoing new revenue to parcel out — either all at once or at $53 million per year in new ongoing spending, Stavneak said.

The small pot of available money comes despite the economists who spoke saying the national and Arizona economy actually is doing very well, with job creation strong and inflation decreases prompting interest rate cuts by the Federal Reserve. Still, the consensus was that the economy will only grow slowly in the coming year, just nearing 2% a year.

Asked at a press conference last week, after the economists met, about the tiny amount of money she will have to get anything new done, Hobbs declined to get into specifics.

The governor has made it clear she’s hoping to flip the Legislature to Democratic control next month, giving her plans a friendlier reception. But doing that won’t help her get rid of the Ducey-era tax cuts that helped create a budge crunch — it would take a politically impossible two-thirds vote of the House and Senate — or to ensure her ability to restore spending cuts and budget for her priorities.

“My goal for this budget is to again have a bipartisan budget that addresses the needs of Arizonans, that continues to invest in critical services, that invests in public education, that supports small businesses, our veterans and is a balanced budget,” she said.

“We’ve done that the last two years,” Hobbs said. “We did that last year in the face of a nearly $2 billion budget deficit. And I have confidence that we’ll be able to do that this year.”

But Sen. John Kavanagh who leads his chamber’s appropriations committee, likened the cash available to “fine tuning money.”

That means those cuts the Legislature and Hobbs made earlier this year to plug that $2 billion deficit are mainly locked in.
“‘Baked in’ may be too strong a word,” Kavanagh said Friday.

“Delayed might be a better term,” he continued. “It’s unfortunate that the economy is so sluggish.”

But the Fountain Hills Republican also put a bit of a partisan spin on it.

“Not to get overly political, but I think if President Trump wins in November, those numbers will be a lot higher,” he said.

However, the deficit and the now-ongoing crimp to state revenues can be directly tied to political acts taken by other Republicans: Ducey and the GOP-controlled Legislature.

They approved a $2 billion state income tax cut in 2021 that fully hit last year. On top of that, the state is on track to spend $912 million next year for the new universal school voucher program approved in 2022, Ducey’s last year in office. Only a small part of that spending is offset by lower public K-12 school costs from children leaving for private schools, since most students getting new vouchers were already private school students, with their parents picking up the tab.

Kavanagh — like most Republican lawmakers — still thinks the tax cuts were worth it. He argues that $2 billion in income tax cuts don’t equal the same amount in revenue loss. That’s based on the argument the better tax environment lures new residents to the state and grows the economy, with the attendant growing tax revenue.

Democrats, however, loudly decry the cuts as mainly going to the wealthy and hurting Arizona’s ability to fund important state functions like schools and healthcare.

“I also don’t regret giving ordinary people more money in their pockets, and employers having more money to invest in new jobs” Kavanagh said.

Still, having to cut spending hurts, and state agencies are lining up for much more than is available for Hobbs to dole out next year.

The state’s three public universities, for instance, are pushing for a huge boost in state support, seeking more than $700 million a year in new funding on top of their current take of about $970 million a year. They argue that last year’s cuts added to years of waning state support and they need the money to sustain programs like the Arizona Teachers Academy, which pays tuition for students who vow to teach in the state’s public schools.

The budget analysts estimate 90,000 students will get vouchers next year, bringing spending to $912 million. About 1.1 million students attend district or charter public schools, and this year’s state budget allocates $7.6 billion for them, nearly half of overall spending.

The state’s Medicaid plan says it needs an additional $251 million, the Department of Child Safety is seeking $64 million, mostly to deal with growing group home costs and a new computer system. And the Arizona Commerce Authority, which doles out tax breaks and other support to businesses expanding in the state, wants $88 million. That’s just a taste of the budget requests filed by the dozens of state agencies and boards.

Not renewing Proposition 123 is expected in the budget projections.

It was approved by voters in 2016 after Ducey reached a deal to end a long-running lawsuit that alleged the state vastly underfunded schools. It boosted land trust withdraws to fund about $3.5 billion in additional K-12 general fund spending funding over a decade.

Last January, Republican lawmakers and Hobbs proposed competing plans to put an extension on this November’s ballot.

Hobbs wanted to split the money between general K-12 funding, teacher and support staff pay and school safety, while GOP lawmakers wanted all the money going to teacher pay. That plan, however, would have led to a cut to underlying school funding.

And both plans would keep pulling extra cash from the land trust, a pool of more than 9 million acres given to Arizona by the federal government at statehood, with revenues from leases or sales mainly dedicated to K-12 schools. Proposition 123 increased the amount of yearly revenue spent rather than reinvested to keep the fund stable.

Neither went anywhere — meaning the 2025 Legislative session is the last chance for a fix that keeps the school funding going. A special election would be needed to pass any deal Hobbs and lawmakers are able to hammer out.